TPS Trade Alert – May 29, 2013
May 29, 2013
Recommendation:
Buy ZaZa Energy (NASDAQ: ZAZA) up to $1.58 per share.
Trade Rationale:
There are numerous inexpensive oil & gas exploration companies on the market. The low share price (and market cap) of many of these companies stems from the uncertain nature of the industry.
You see, there are all kinds of issues which can pop up during the exploration and drilling for natural resources. And of course, oil and gas prices can fluctuate substantially from month to month.
In many cases, the price of oil and gas directly affects drillers’ bottom lines. With small companies, it can mean the difference between being profitable or incurring a loss.
However, one way small drillers can lessen their exposure to fluctuating prices is by focusing on liquid-rich properties. Now obviously that includes oil, which tends to maintain a relatively high price per barrel. But, it also means liquid natural gas (LNG).
LNG also trades for a premium over standard natural gas. As such, companies drilling for oil and LNG are likely to reach profitability more quickly and more consistently.
One inexpensive driller with access to a high concentration of liquid assets is ZaZa Energy (NASDAQ: ZAZA).
ZAZA focuses on the exploration and development of unconventional oil and gas resources in the US. The company’s principal properties include assets in the Eagle Ford Shale and Eaglebine Shale in Texas.
There several reasons why ZAZA stands out among other inexpensive oil & gas exploration companies.
I already mentioned the company’s high concentration of liquid-rich assets. But even better, management is doing everything in its power to laser-focus the company on only the most promising properties.
In fact, ZAZA has recently announced a joint venture on 73,000 acres to aggressively develop its core focus area. The deal is with a large independent operator – so no credibility issues are at stake.
Meanwhile, the company sold off 13,000 acres of another area of its Eagle Ford property to help strengthen its balance sheet. The deal will pull in $52.5 million which will be mostly used to pay off debt.
And that’s not all…
ZAZA is proving extremely adept at cutting costs. For example, in the most recent quarter, operating costs were $8.6 million. That’s a huge decline from the $43.7 in the same period a year ago. And, the costs cutting came from lowering general and administrative expenses – it’s not just a one-time deal.
More importantly, the company’s first quarter revenues jumped 33% year over year. The increase was driven by higher oil and gas production as you would expect.
Even better, net loss improved to just $2.9 million compared to a whopping $117.8 million the year prior. Clearly, the company’s financials are headed in the right direction.
However, even though ZAZA is seeing increasing revenues, decreasing costs, and improving net loss figures, investors have mostly been ignoring the stock.
As of this writing, ZAZA shares are trading at $1.38 – well below the 200-day moving average near $2.00. And, the stock is substantially below its 52-week high of $5.00.
If the stock returns to the $5.00 level, we’ll see gains of over 250%. And, for a company focusing on liquid-rich properties with improving financials, it’s a very realistic scenario.
Buy ZAZA now while the shares are trading at an extreme discount.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | ZaZa Energy |
| Ticker: | ZAZA |
| Recent Price: | $1.38 |
| Market Cap: | $141.5 million |
| Avg. Daily Volume: | 427,126 shares |
Chart:
Category: TPS Trade Alert
